Today's Debt, Tomorrow's Burden

College student Yoni Gruskin heads organization that advocates for fiscal responsibility in the government.

College freshman Yoni Gruskin sometimes walks around Penn’s campus wearing a sign that bears a thirteen-digit number. If you ask him about it, he will be happy to explain that it’s the U.S. national debt – more than nine trillion dollars and counting.

The sign is one of many tactics Gruskin and fellow members of the organization Concerned Youth of America (CYA) use to educate their peers about the national debt. He founded the organization with a group of friends as a senior in Phillips Academy in Andover, Mass., and started a Penn chapter during his first semester here. Gruskin, who is executive director of CYA, believes that the issue is one of the most important for people his age to understand.

“This is the issue that will affect our generation more than any other issue that’s being debated in this election or any other election,” Gruskin says. “This has to do with the kind of country we’ll be raising our children in and whether we’ll inherit a prosperous America and a government that’s still functioning.”

Although there are many national organizations grappling with the issue of fiscal responsibility, Gruskin feels that few of them are youth oriented. “People are used to hearing about this issue from older men and women, and their discussions are thick with policy details and large numbers,” Gruskin explains. “We’re not going to pretend that this is the sexiest issue going around campus, but we think our strength is that we speak the same language as kids our age.”

This language includes experimenting with what Gruskin calls “PR stunts” – one of which made it all the way to the Sundance Film Festival. Last November, CYA members dressed in prison jumpsuits (symbolizing that America’s youth were “prisoners of national debt”) stood on the campus’ Locust Walk and distributed literature about the issue. The demonstration and a CYA-hosted forum on the topic were filmed as part of a Sundance documentary called I.O.U.S.A., which will also be shown at the Philadelphia Film Festival this April. Gruskin hopes the film will turn this “wonkish, policy-oriented issue into one that gets people really fired up.”

With the support of both Penn faculty and of business, political and civic leaders around the country, the group is planning future awareness-raising events. CYA is currently working with the Concord Coalition, a grassroots organization focused on fiscal responsibility, and Penn’s Fels Institute of Government to bring former U.S. comptroller general David Walker to speak on the issue at Penn. The group also plans to co-host a forum at the Philadelphia Convention Center that will include other schools from the region.

Gruskin’s future goals for CYA go beyond education to affecting actual policy change. “Once we feel that we have a strong base of support,” Gruskin says, “we’re going to try to tackle specific pieces of legislation and specific congressional habits with a bottom-up campaign that includes letters to the editor, letters to congressmen and other standard grassroots tactics. We want to show people that our generation is alert to this issue, cares about this issue, and isn’t going to sit by while our future is pulled out from under us.”

US National Debt

How bad is it?

Some statistics, please! (courtesy of Glenn Beck)

$200 billion is the approximate total amount of write-downs announced so far as a result of the current credit crisis.

$14.1 trillion is the size of the entire U.S. economy

And $53 trillion is (drum roll please) the approximate size of this country's bill for the Social Security and Medicare promises we've made.

A million seconds is 12 days. A billion seconds is 32 years. A trillion seconds is 32,000 years. And 53 trillion seconds? 1.7 million years.

The problem will first make impact in the year 2019 when the Medicaid trust fund becomes insolvent.

Only an immediate 122 percent increase in Medicaid taxes and a 26 percent increase in Social Security taxes can prevent (or more likely, delay) its impact (not very likely!).

US Treasury Secretary:

"Rising costs will ... consume nearly all projected federal revenues ..."

Translation: Every single tax dollar that is sent to Washington will be used to pay for just these two programs.

That means no money is left for anything else. Nothing. No Department of Defense or Homeland Security, no Department of Energy, no Department of Justice, no Environmental Protection Agency.

Former Comptroller General of the United States David Walker tries a different tactic. He writes that our unfunded promises translate into "an IOU of around $455,000 per American household."

PS Check out the current Cost for the War in Iraq.

PPS On Wednesday, April 2, 2008, we find the following (emphasis in the original):

Yes, your tax dollars will be used to bail out BEAR STEARNS

from digg

Today CNBC and other news outlets reported that Treasury Secretary Hank Paulson confirmed what we have suspected. Since this loan was backed by Bear Stearns' worst collateral, worthless assets consisting of subprime mortages, YOUR TAX DOLLARS, $100 PER CITIZEN, WILL BE USED TO BAIL OUT RECKLESS INVESTMENT BANK BEAR STEARNS.

Financial Rot

Robert Samuelson offers us an interesting op-ed piece in the Washington Post about the current financial crisis.

Highlights for your consideration...

What distinguishes this crisis -- which brought down Bear Sterns over the weekend -- is that it involves the entire financial system, not just depository institutions, and it's more mystifying than any of its predecessors.

Recent estimates of subprime losses range from $285 billion to $400 billion. They might go higher. Ignorance breeds caution and fear.

The stunning fall of Bear Stearns reflects these realities. It was not a traditional commercial bank that took deposits from the public but America's fifth-largest investment bank, which funded most of its operations with borrowed money ("leverage"). On average, the ratio of borrowed money to underlying capital for investment banks and hedge funds is about 32 to 1, according to a recent study. Many of these loans -- commercial paper, "repurchase agreements," bank credits -- are backed by the securities owned by the borrowing financial institutions.

What this means is that if lenders became worried about the worth of these securities, they might ask for more collateral or pull their loans. In effect, that's what happened to Bear Stearns. Deprived of its credit lifeblood, Bear Stearns either had to collapse or be purchased by someone with credit. J.P. Morgan Chase bought Bear for almost nothing: $236 million for a firm valued at $20 billion in January 2007.

Financial institutions (banks, investment banks, hedge funds and others) are interconnected through networks of buying, selling, borrowing and lending. These require confidence that commitments made will be commitments honored. If confidence collapses, the processes of extending credit for the economy and of trading -- for stocks, bonds, foreign exchange -- may also collapse.

But in trying to calm financial markets, the Fed has spewed out enormous amounts of money and credit that have depressed the dollar's exchange rate and could aggravate inflation. The effort to fix one problem may lead to others.

You CAN Get a Free Lunch!

Want to cut your taxes... legally?

Just hire some powerful lobbyists!

That's the message of a new book...

Free Lunch: How the Wealthiest Americans Enrich Themselves at Government Expense (and Stick You with the Bill) by David Cay Johnston.

“If you’re concerned about congressional earmarks, stock options (especially backdated options), hedge fund tax breaks, abuse of eminent domain, subsidies to sports teams, K Street lobbyists, the state of our health-care system, to say nothing of the cavernous gap between rich and poor, you’ll read this fine book—as I did—with a growing sense of outrage. Free Lunch makes it clear that it’s high time for ‘We the People’ to stand up and be counted.”
—John C. Bogle, founder and former chairman, The Vanguard Group

Can't afford a lobbyist? Then be prepared to cough up a higher percentage of your personal income.

That's the way the system works...

Lobbyists wouldn't have it any other way!

And the Dollar Goes down the Drain...

Dollar dives to near 13-year low vs. yen

Greenback plunges after Federal Reserve slashes discount rate at emergency meeting.

March 17, 2008: 12:08 PM EDT

TOKYO The dollar nose-dived to its lowest levels in 12 1/2 years Monday in Asia, falling below 96 yen as the Federal Reserve's rate cut failed to calm market fears about more U.S. bank writedowns.

The Fed on Sunday cut its discount rate, or its lending rate to financial institutions, by a quarter point to 3.25%.

The move only managed to give a temporary lift to the U.S. currency before it began its steep decline.

"The Fed's action is needed but it leaves the current main market problems unresolved, and there seems to be nothing that can stop this [dollar-selling] flow for now," said Masafumi Yamamoto, head of foreign exchange strategy at Royal Bank of Scotland.

The dollar fell to 95.72 yen, its lowest point since August 1995, in morning trade in Tokyo before recovering to 96.84 in the afternoon. Late Friday in New York the dollar was trading at 99.17 yen. It broke below 100 yen just last Thursday.

The euro also rose to a record against the dollar, climbing as high as $1.5851 from $1.5676 Friday.

News that JPMorgan Chase (JPM, Fortune 500) had bought rival investment bank Bear Stearns (BSC, Fortune 500) - a move aimed at averting a bankruptcy - also sparked renewed market worries about the extent of the credit crisis, sending Asian stocks tumbling.

Japan's benchmark Nikkei 225 stock index fell 3.71%, or 454.09 points, to close at 11,787.51.

The Bear Stearns news "increased players' fears about credit markets and liquidity conditions, making it increasingly difficult to build dollar-long positions," said Keiichi Iguchi, a dealer at Resona Bank.

It was hard to predict how much further the dollar may fall, as "there are no concrete policy measures from either the Japanese or U.S. governments," said Masanobu Ishikawa, manager of foreign exchange at Tokyo Forex and Ueda Harlow.

And this...

April 11, 2008

The official Xinhua News Agency reported that the yuan was trading at 6.9920 to US$1 -- the first time it has ventured below the 7 yuan mark since the government loosened the unit's peg to the dollar in 2005. The yuan has gained about 18 percent in value since then.

Where DOES All That Money Go?

Want a readable guide to the US Federal Budget?

Try“Where Does the Money Go?: Your Guided Tour to the Federal Budget Crisis ” by Scott Bittle and Jean Johnson (Collins, $16.95 in paperback). This is a book that manages to be entertaining and irreverent while serving as an informative primer on a subject that is crucial to the future of all Americans.

Highlights from the New York Times...

In 31 of the last 35 years, the federal government has spent more money than it has taken in. (The exceptions were the budget surplus years 1998 to 2001.) Along the way, the government has amassed a debt that now exceeds $9 trillion. Over $2 trillion of that is owed to foreign banks and other international investors, with China holding $420 billion and the oil-exporting countries $113 billion, using figures from the 2006 budget.

Mr. Bittle and Ms. Johnson predict that even with continued foreign investment and financial forbearance, the nation may soon find it impossible to fulfill its existing and future commitments to its own citizens in the form of Social Security and Medicare payments. In 2006, Social Security, Medicare and Medicaid consumed 39.7 percent of the federal budget of $2.6 trillion, compared with 19.7 percent for defense.

In the future, the cost of entitlement programs will balloon as 78 million baby boomers age. In 2006, there were fewer than 50 million Social Security recipients; 12 years from now, there will be nearly 70 million. With health care costs rising faster than inflation, the part of Medicare that covers hospital costs for the elderly is already paying out more than it takes in from payroll taxes.

“Unless something changes, we could see a time (around 2040, if nothing is done) when nearly every tax dollar collected will be needed to pay for retirement and health care for the elderly and interest on the debt,” the authors warn. “There will be almost no money for anything else, except maybe a basic national defense.”

Their proposed solutions include raising to 70 the age at which people receive retirement benefits; making people pay more in Social Security taxes, as well as privatizing Social Security (“but very slowly”); rethinking the prescription drug program, is expected to add $518 billion in costs by 2013; redesigning Medicare so that people can shop around for the most effective coverage; and passing a national value-added tax to help pay for Social Security and Medicare.

For the time being, the globally respected “faith and credit” of our federal government are keeping the United States afloat financially. But if we are unwilling to swallow the kind of bitter medicine that Mr. Bittle and Ms. Johnson prescribe, our country may one day be unable to make even the interest payments on our $9 trillion debt, payments that are now $226.6 billion a year — and we would be forced to declare ourselves a bankrupt nation.

Problems? What Problems?

Did you notice the Bear Stearns saga that played out this week?

Bear Stearns has problems?

Anybody notice any problems?

Bear Stearns stock lost nearly half of its market value, about $5.7-billion, in a matter of minutes and pulled the broader market down with it. The Dow Jones industrial average fell nearly 200 points.

If Bear Stearns were to go under, "it has the potential of bringing down the whole market," said Richard Bove, a Punk, Ziegel & Co. analyst. "This is the crescendo of the crisis."

Bear Stearns is one of the world’s biggest custodian banks, effectively a clearing and warehouse of international financial instruments, and its collapse would wreak havoc in capital markets.

James Cayne, known for his aloof management style, stepped down as chief executive of Bear Stearns at the beginning of the year.

Mr Cayne, who had been chief executive since 1993, was forced to resign after the sub-prime mortgage crisis led to the company suffering record losses.

A world-class bridge player, Mr Cayne, 74, was heavily criticised for the time he spent playing bridge and golf last year while the bank was engulfed in sub-prime turmoil. He also found himself embroiled in controversy after The Wall Street Journal alleged that he had smoked marijuana at a 2004 bridge tournament. This was a claim that he strenuously denied in an e-mail to the group’s 15,000 employees.

The cigar-smoking former scrap metal salesman, who still holds a stake of about 5 per cent in Bear Stearns, remains as chairman of the board. He has served as a director since 1985.

The New York Times had an interesting article about how the past week played out for the Wall Street firm.

You can always trust what corporate executives tell you, right?

Here's how it actually played out, day by day...

The rumors began in earnest on Monday, as whispers circulated that Bear faced a liquidity crisis linked to the still-dropping value of mortgage-backed securities an affiliate had issued. Though most of its bigger rivals have also taken write-downs related to those investments, Bear had long ago become the embodiment of the mistakes of the subprime mortgage era. Despite repeated assertions that it had enough capital, Bear-issued securities remained subject to credit rating downgrades.

The swell of rumors prompted Bear’s chief executive, Alan D. Schwartz, to issue a terse statement late that day: “Bear Stearns’ balance sheet, liquidity and capital remain strong.” But shares in the firm closed down 11 percent at $62.30.

To back up Mr. Schwartz’s statement, the Securities and Exchange Commission stepped in. The agency’s chairman, Christopher Cox, told reporters on Tuesday that the regulator was reviewing capital levels at the five big investment banks on a constant basis. “We have a good deal of comfort about the capital cushions that these firms have been on,” he said. That seemed enough to stanch the speculation: Bear’s stock rose slightly to close at $62.97.

By Wednesday, the firm took a more decisive step. Mr. Schwartz spoke with CNBC’s David Faber that morning, saying that Bear’s holding company ended last year with a $17 billion liquidity cushion, which is “virtually unchanged” so far this year. Bear’s stock dipped 2 percent to $61.58.

The situation changed by Thursday. Inchoate speculation gained tangibility as reports from the likes of the Wall Street Journal outlined potential blows to Bear’s stability. The Journal reported that several firms regarded Bear as a potentially risky counterparty, with some clients going to far as to request that Goldman Sachs, Morgan Stanley and others serve as counterparties to Bear on several transactions. And hedge funds that use Bear as a primer broker — a provider of services like clearing trades — had shifted some of their business to other shops, the Journal said.

By that point, it seemed less clear whether these investors and clients had seen proof that Bear was suffering a liquidity crisis, or were simply reacting to a growing wave of pessimism and fear. Bear’s stock closed down 7.4 percent at $57.

Whether the rumors were true had become almost irrelevant by Friday. In his statement announcing the emergency financing, Mr. Schwartz said that while his statements over the past week had been truthful, “our liquidity position in the last 24 hours had significantly deteriorated.”

Bear’s stock was down about 39 percent by noon on Friday, trading at $34.75.

-----------------------------------------------------------------

Bear Stearns, facing collapse because of the mortgage crisis, 
agreed Sunday evening to be bought by JPMorgan Chase 
for a bargain-basement price of less than $250 million, 
the two companies announced.

The all-stock deal values Bear Stearns at about $2 a share, 
based on JPMorgan's closing stock price on Friday, the 
companies said. 

-------------------------------------------------------------------

And what can you really say about this?

Bear Stearns Chairman Played Cards Amid Crisis

Mon Mar 17, 2008 8:01am EDT

NEW YORK (Reuters) - Bear Stearns Cos Inc Chairman Jimmy Cayne was playing cards in a tournament late last week while his company's future appeared to be at risk, according a published report.

As the bank hammered out an emergency funding deal on Thursday with the Federal Reserve and JPMorgan Chase (JPM.N: Quote, Profile, Research), which resulted in Bear's shares falling by as much as half, Cayne was playing in the North American Bridge Championship in Detroit, The Wall Street Journal reported on its Web site on Friday.

Cayne, who in January stepped down as Bear Stearns' long-time chief executive, is no stranger to controversy about his hobbies. Last year he was criticized for spending too much time playing bridge and golf while Bear stumbled on wrong-way bets on subprime mortgages.

Cayne played cards last week during a period in which Bear Stearns CEO Alan Schwartz held conference calls with directors about the pending cash pledge, the newspaper said, although Cayne participated in at least some of the dialogue.

The Wall Street Journal said Cayne did not respond to a request for comment that it left at his New York office.

-------------------------------------------------------------------

April 25, 2008 CEO James Cayne has sold all of his holdings in Bear Stearns stock for $61 million

Sad State of the US Dollar...

Dollar sinks worldwide

Antique store owners in lower Manhattan, ticket vendors at India's Taj Mahal and Brazilian business executives heading to China all have one thing in common these days: They don't want U.S. dollars.

Hit by a free fall with no end in sight, the once mighty U.S. dollar is no longer just crashing on currency markets and making life more expensive for American tourists and business people abroad; its clout is evaporating worldwide as foreign businesses and individuals turn to other currencies.

Experts say the bleak U.S. economic forecast means it will take years for the greenback to recover its value and prestige.

Negative dollar sentiment is growing in nations where the dollar was historically accepted as equal or better than local currency — and dollar aversion is even extending to some quarters in the United States.

At the Taj Mahal, dollars were always legal tender, alongside rupees, for entry into the palace. But because of the falling value of the dollar, the government implemented a rupees-only policy a month ago. Indian merchants catering to tourists have also turned bearish on the dollar.

"Gone are the days when we used to run after dollars, holding onto them for rainy days," said Vijay Narain, a tour operator in the city of Agra where the Taj Mahal is located. "Now we prefer the euro. It gives us more riches."

In Bolivia, billboards feature George Washington's image on a $1 bill alongside a bright pink 500 euro note, encouraging savers to turn to the euro to tuck away money earned abroad or sent home in remittances.

"If the dollar's going down ... save it in Euros!!!" say the signs popping up around La Paz for Bolivia's Banco Bisa.

And in neighboring Brazil, the Confidence Cambio money-changing service was the first to start offering yuan so travelers to China no longer have to change the money into dollars first. The service is already a hit because Brazil does big business with China, and lots of Brazilians are heading to the Olympics this summer.

"Now we tell people not to take dollars when they go abroad, it's better to change it directly to the local currency," said Fabio Agostinho, one of the firm's managing partners. "If people leave here with dollars and go abroad, they lose when they exchange them. It's the same thing whether they're heading to China, Europe or even Argentina."

In Manhattan's Bowery district, Billy LeRoy, the owner of Billy's Antiques & Props, prefers payment in euros so he can stockpile the currency for his annual antique buying trip to Paris.

"Whip out dollars at the French flea market now, and they'll shoo you away," he said at his store near apartment buildings where Europeans are snapping up units because they've become dirt cheap. "Before it was like the second coming of Christ, but now they don't want it or if they do take dollars, they're going to take their pound of flesh."

The dollar has steadily eroded in value against the euro and other currencies since 2002 as U.S. budget and trade deficits ballooned, but fears of an American recession and credit crisis have sent the dollar to stunning lows amid predictions the slump will continue for a long time.

The euro traded for a record $1.5625 before declining to $1.5586 Thursday while the dollar dropped below 100 Japanese yen for the first time since November 1995. It traded as low as 99.75 yen before recovering some ground to 101.68 yen. The dollar also recently hit a 10-year low against the Chilean peso, and fell to its lowest level against Brazil's real since the nation floated its currency in 1999.

While low dollar cycles have come and gone for decades, experts caution that it's now much more difficult to predict when this one will end because the euro didn't exist as competition for the dollar before.

During previous U.S. economic downturns, big foreign funds typically snapped up U.S. treasuries, helping to shore up the dollar to a certain degree. But the euro and currencies from other nations are now seen as legitimate options, and interest rates are higher outside the United States — meaning the funds can get better returns on investments elsewhere.

"You have the U.S. still holding this trade deficit, but now you have the possibility of a U.S. led recession, and you have a weakening currency. So it's a very dark outlook for the dollar," said Gareth Sylvester, senior currency strategist with the British firm HIFX Inc., which executed $40 billion in currency trades last year.

Nations that were once seen as incredibly risky for investments — such as Brazil — are now seen as good long-term bets. And countries such as China and Russia, with burgeoning coffers of money to invest abroad, are thought to be shifting some of their reserves or diversifying fresh income to destinations and currencies outside the United States.

It used to be important for most countries "to accumulate dollars as a precautionary element against rainy days, but the accumulation of reserves has become so large in most emerging market countries that the balance is way beyond what's needed for precautionary reasons," said Eliot Kalter, a fellow at Tufts University's Fletcher School of Law and Diplomacy and a former International Monetary Fund official.

While most experts believe the dollar will eventually regain strength, no one is willing to predict when that will happen.

"I think the factors that are affecting the weakness of the dollar will be reversed, but no time soon," Kalter said.

The problem right now, is that "people just don't want to be holding U.S dollars and U.S.-based equities," Sylvester added. "If you are an investor with a million dollars to invest, you look for the highest yield — you're looking at South Africa, Australia, New Zealand."

And it's not only the big time investors that are looking for other options.

In Peru, where savings in U.S. dollars were long a popular hedge against inflation, many citizens are closing dollar accounts in favor of Peruvian soles.

At the same time, businesses like supermarkets, movie theaters and cable TV companies that used to accept dollars are now demanding soles.

Edwin Figueroa, a 29-year-old systems engineer, switched his checking account from dollars to soles seven months ago as the dollar's decline started worrying him. He doesn't think he'll be going back anytime soon.

The Peruvian sol "is stable now," he said. "And maybe in a year, the dollar will even go lower."

The True Costs of War

According to a recent article in the St. Petersburg Times, the average household in the United States is currently paying around $100 to $140 a month for the war in Iraq.

In 2008, its sixth year, the war will cost approximately $12 billion a month, triple the "burn" rate of its earliest years, Nobel Prize-winning economist Joseph E. Stiglitz and co-author Linda J. Bilmes report in a new book.

Beyond 2008, working with "best-case" and "realistic-moderate" scenarios, they project the Iraq and Afghan wars, including long-term U.S. military occupations of those countries, will cost the U.S. budget between $1.7 trillion and $2.7 trillion -- or more -- by 2017.

Interest on money borrowed to pay those costs could alone add $816 billion to that bottom line, they say.

The nonpartisan Congressional Budget Office (CBO) has done its own projections and comes in lower, forecasting a cumulative cost by 2017 of $1.2 trillion to $1.7 trillion for the two wars, with Iraq generally accounting for three-quarters of the costs.

Variations in such estimates stem from the sliding scales of assumptions, scenarios and budget items that are counted. But whatever the estimate, the cost will be huge, the auditors of the Government Accountability Office say.

In a January 30 report to Congress, the GAO observed that the U.S. will be committing "significant" future resources to the wars, "requiring decision makers to consider difficult trade-offs as the nation faces an increasing long-range fiscal challenge."

In their book, "The Three Trillion Dollar War," Stiglitz, of Columbia University, and Bilmes, of Harvard, report the two wars will have cost the U.S. budget $845 billion in 2007 dollars by September 30, end of fiscal year 2008, assuming Congress fully funds Bush administration requests. That counts not just military operations, but embassy costs, reconstruction and other war-related expenses.

That total far surpasses the $670 billion in 2007 dollars the Congressional Research Service says was the U.S. price tag for the 12-year Vietnam War.

Looking ahead, both the CBO and Stiglitz-Bilmes construct two scenarios, one in which U.S. troop levels in Iraq and Afghanistan drop sharply and early -- to 30,000 by late 2009 for the CBO, and to 55,000 by 2012 for Stiglitz-Bilmes -- and a second in which the drawdown is more gradual.

Significantly, the two studies view different time frames, the CBO calculating possible costs met in the next 10 years, while Stiglitz and Bilmes also include costs incurred during that period but paid for later, such as equipment replaced in post-2017 budgets.

This factor figures most in the category of veterans' medical care and disability payments, where the CBO foresees $9 billion to $13 billion in costs by 2017. Stiglitz and Bilmes, meanwhile, project $422 billion to $717 billion in costs over the lifetime of soldiers who by 2017 are wounded or otherwise mentally or physically disabled by the wars.

"The CBO is only looking 10 years out on everything," Bilmes noted in an interview.

For its part, a CBO critique suggested that Bilmes and Stiglitz might be overstating the expense of treating veterans' brain injuries, a costly category.

The two economists say their calculations are conservative, because they don't encompass many "hidden" items in the U.S. budget. Their basic projections also exclude the potentially huge debt-service cost -- on which CBO approximately agrees -- and the cost to the U.S. economy of global oil prices that have quadrupled since 2003, an increase analysts blame partly on the Iraq upheaval.

Estimating all economic and social costs might push the U.S. war bill up toward $5 trillion by 2017, they say.